Retrospective depreciation claims offer an opportunity for property investors to recover unclaimed depreciation from past years. This process involves amending previous tax returns to include missed depreciation deductions under Division 40 and Division 43 of the Income Tax Assessment Act 1997. Understanding the nuances of this process can significantly impact the financial outcome for investors.
Under these divisions, plant and equipment (Division 40) and capital works (Division 43) depreciation can be claimed. If you've missed claiming these deductions, you can amend your tax returns for up to two years for individuals or four years for small business entities. The most common misconception is that once a tax return is lodged, depreciation claims are final. However, the ATO allows amendments within these time frames, which can lead to substantial tax savings.
Take a practical example: Imagine a 2015-built 3-bedroom townhouse in Richmond, Melbourne, purchased for $750,000. The investor, at a 37% marginal tax rate, missed claiming depreciation for the first two years. Engaging a Chartered Quantity Surveyor, they discovered missed deductions of $10,000 per year. Amending their returns saved them $7,400 in tax refunds across two years.
In our experience reviewing thousands of properties across Australia, we often see investors overlooking depreciation in their initial years of ownership. Many assume older properties aren't eligible for significant deductions, missing out on potential savings. Additionally, some fail to update their depreciation schedules after renovations, missing further deduction opportunities. Consistently, we've found that engaging a QS early can prevent these costly oversights.
The answer can differ depending on your situation. For properties acquired post-9 May 2017, second-hand residential properties face restrictions on Division 40 claims. Similarly, pre-1987 buildings may have limited capital works deductions unless substantial renovations were done. For SMSFs, the rules can be more restrictive, and commercial properties may have different eligibility criteria.
Navigating retrospective claims requires detailed knowledge of both taxation and construction. Engaging a Chartered Quantity Surveyor ensures that depreciation schedules are accurate and compliant, while an accountant can effectively integrate these into amended returns. Together, they can maximise your deductions and ensure ATO compliance.